Germany Rolls Back Labor Reforms, Sticks to Hard Line in Europe

Angela Merkel will soften some of her labor policies, but not her hard line in Europe.

Germany’s next government will seek to roll back some of the labor reforms that made the country one of most competitive in Europe but intends to maintain a hard line in the continent’s debt crisis, now in its fourth year.

Chancellor Angela Merkel, whose conservative parties fell just five seats short of an absolute majority in September, announced a coalition deal with her Social Democrat rivals on Wednesday. She resisted demands from the left to raise taxes on the rich but agreed to limit temporary work contracts to eighteen months and introduce an hourly minimum wage of €8.50.

Most workers who would benefit from a federal minimum wage are in former East Germany. Roughly a quarter of the workers there earns less than €8.50 per hour compared to only 10 percent in the states that composed the western Federal Republic of Germany before reunification in 1990.

The country’s leading economic institutes are skeptical. “A blanket minimum wage that applies to all sectors and all regions would probably have significantly more negative consequences for the labor market than the current sectoral deals,” they warned last month in a twice yearly report commissioned by the German government.

Unlike most other European countries, Germany has relied exclusively on collective wage agreements that are negotiated per region between employers and labor unions. Coverage by such agreements has decreased to 59 percent of the workforce from more than 70 percent in 1998, however, notes the Hans Böckler Foundation, a think tank that is aligned to the trade union movement. Low pay has surged especially in the wake of labor reforms that were enacted in the early 2000s — and which enabled Germany to weather the recent economic and financial crises with relatively low unemployment.

Critics fear that a federally mandated minimum wage will prompt companies in the east of Germany to move their operations across the border into the Czech Republic and Poland where labor costs are much lower.

To reduce that risk, the Christian and Social Democrat parties agreed to phase it in over a period of years, with exceptions allowed until 2017.

The Social Democrats also extracted concessions on pensions. In the future, Germans who have worked for 45 years can retire at the age of 63, four years earlier than the statutory pension age.

Social democrat leaders hope these signature achievements will convince their members to vote in favor of the coalition agreement next month and help them stave off another disappointing election result. The last time they formed a government with Merkel’s parties, they lost more than 10 percent support in the polls. Even if a majority of German voters favors another “grand coalition,” many also say they see little differences between the major parties anymore. This could benefit the opposition Greens and the radical Die Linke which together hold 20 percent of the seats in parliament.

Merkel’s domestic policy concessions are unlikely to translate into a softer German stance in Europe. The coalition agreement rules out the pooling of sovereign debt in the eurozone and calls for binding contacts between countries in the currency area to boost its competitiveness. Merkel’s ally and fiscal hawk Wolfgang Schäuble is also expected to keep his job as finance minister.

The parties proposed no radical changes in Germany’s green energy program which had caused electricity prices to skyrocket. Up to 60 percent of Germany’s energy should come from renewable sources by 2030.

Despite the higher spending commitments the coalition agreement imply, the parties promised there would be no new taxes and plan to start paying down Germany’s debt in 2015.